The manufacturing exodus from China will likely benefit others in Southeast Asia.

By Phillip Orchard

It’s been a tough few years for Vietnam. Hanoi has felt increasingly abandoned by its Southeast Asian counterparts and outside powers alike in its dispute with Beijing over the South China Sea. Meanwhile, a rare bout of political instability in the senior ranks of the ruling Communist Party, along with a proliferation of protest movements over a range of issues, have unnerved the government and speak to rising social and economic pressures at home. But in the Trump administration’s trade war, Vietnam might get a timely gift – one that will offer the country a more prominent, if awkward, role in the growing U.S.-Sino competition.For more than a decade, China has been gradually losing foreign manufacturers to its neighbors due to rising wages. Southeast Asian states have been natural beneficiaries, having invested heavily in manufacturing and export infrastructure since putting the regionwide chaos wrought by the Cold War largely behind them. In northern Vietnam, wages are little more than half those in the manufacturing heartland of southeastern China. As a result, foreign investment has surged in Vietnam, rising nearly 8.5 percent in the first half of this year over the same period in 2017 – itself a record year.Meanwhile, Vietnam has signed onto the revived Trans-Pacific Partnership trade pact, which is expected to be ratified by all 11 remaining members this year, and it’s moving toward a major free trade agreement with the EU. This means the country will become only more attractive to firms seeking unchecked access to lucrative consumer markets in Europe and the Pacific Rim. (For similar reasons, Thailand and Indonesia are now moving toward joining the TPP.)But the trade war’s effects on this trend depend on just how far the U.S. is willing to escalate matters, particularly whether it follows through with the tariffs on $200 billion in Chinese exports the White House announced this week. The spat may end up strengthening the U.S. dollar and weakening the yuan to the point that exporting from China remains competitive. But on the whole, the added costs from tariffs, along with Beijing’s proven willingness to retaliate against firms from geopolitical foes like the U.S., South Korea, Taiwan and Japan, are likely to accelerate the manufacturing exodus from the Middle Kingdom. According to the Peterson Institute, foreign-owned firms are responsible for more than 60 percent of U.S.-bound exports from China. Vietnam is waiting with open arms.

Vietnam’s Trump Card

Unlike their multinational counterparts, Chinese firms can’t head abroad to dodge tariffs nearly as easily, considering the government’s utmost priority is to keep people at home employed. This gives Vietnam another card to play. Since last year, Beijing and Hanoi have been toying with plans to set up a series of bonded zones on the two countries’ shared border, where labor, capital and materials could cross freely. The border zones are close to major Chinese manufacturing centers in Guangdong province and the Yangtze River Delta, and China has invested heavily in cross-border infrastructure links and customs clearance facilities in recent years. With minimal assembly done in the bonded zones, Chinese wares could ostensibly be labeled as made in Vietnam and exported to the U.S. without concern for the new tariffs.The border zones alone can’t facilitate trade on a scale China would need to fully offset the effects of the trade war. And moving goods across borders, however seamlessly, still increases the cost of doing business, making Chinese exports less competitive. Moreover, Chinese transshipments through Vietnam have run afoul of Western powers in the past. In 2016, both Washington and Brussels launched probes into Chinese steel falsely being labeled as made in Vietnam to circumvent EU and U.S. quotas. A country can add a “made in” label to a product so long as it is “substantially transformed” there. But if the U.S. determines that Chinese goods are merely passing through Vietnam en route to the U.S., the goods are likely to end up saddled with tariffs anyway – and Hanoi may end up in Washington’s crosshairs even more than it already has. (Vietnam was included in a recent Commerce Department investigation into unfair trade practices, and President Donald Trump criticized the trade deficit during his visit to the country in November.)Nonetheless, tracking and cracking down on such activities is difficult and requires substantial cooperation from the host country. Ultimately, it’s Vietnam’s choice whether to go along with China here. And this gives Hanoi some much-needed leverage over both the U.S. and China that it could try to cash in on other issues – say, military assistance from the U.S., or the two foreign-backed drilling projects in the South China Sea that Hanoi canceled reportedly under threat from Beijing.Vietnam doesn’t have a completely free hand in the matter. Last month, mass protests erupted in several Vietnamese cities over plans to grant foreign investors (Chinese firms, in particular) 99-year leases over land in several other special economic zones. Chinese businesses were also targeted by widespread nationalist protests in 2014. The Vietnamese leadership shares the public’s wariness of China’s expanding footprint in the country and its track record of economic coercion. Hanoi has long been deeply divided over how much to risk retaliation by taking a harder line against Beijing, leading to bouts of paralysis during crises. Fears of China’s capacity to exploit these divides and undermine the Vietnamese Communist Party’s continued rule was one factor behind its recent launch of a sweeping anti-corruption campaign and a drive to unwind the military’s extensive business interests. (Ironically, both initiatives are modeled on ones successfully implemented by Beijing.) To date, Vietnam has reportedly been dragging its feet on implementing the border zones agreement signed last year, reportedly due to these concerns.The desire to keep nudging economic and security ties with the U.S. forward is presumably playing a role in Hanoi’s hesitation as well. Even without the TPP, Vietnam exported more than $46 billion in goods to the U.S. last year. Still, Hanoi would be more concerned about pleasing the U.S. if Washington had stayed in the TPP and if it felt that the U.S. was willing to go beyond largely symbolic measures in pushing back against Chinese assertiveness in the South China Sea more forcefully on Hanoi’s behalf. Furthermore, since the Obama administration lifted the longtime U.S. embargo on arms sales to Vietnam in 2016, Hanoi has yet to make a major purchase. American arms are uniquely expensive, meaning Vietnam would need the U.S. to shoulder some of the cost to buy more, yet Washington is reportedly considering cutting the budget for security assistance to Southeast Asia instead. Meanwhile, the U.S. has been pressuring countries to reduce arms trade with Russia – the foremost backer of Vietnam’s rapid military modernization.In short, the U.S. hasn’t given Vietnam much reason to shed its historical wariness of close alliances with Western powers. Ultimately, if there’s ample money to be made on the margins of the U.S.-China trade war – or an opportunity to exact concessions from Beijing over the South China Sea – Vietnam won’t say no purely for Washington’s Benefit.

The Bigger Picture

For the U.S., all this speaks to the broader challenge it’s facing in achieving the various goals of the trade war, many of which are working at cross purposes with each other and with broader U.S. strategic aims. If the goal is to lower the overall U.S. trade deficit and restore the competitiveness of U.S. industries that have lost out to globalization, compelling firms to move from one low-cost country to another won’t help. Complicated supply chains flow through too many countries, labor costs in the U.S. are too high, and U.S. firms have invested too much in robotics and automation for labor-intensive manufacturing in the U.S. to be competitive. And as countries target U.S. industries with countermeasures, there will be new incentives for U.S. exporters to head abroad to avoid them. The Harley-Davidson case is instructive here.If the goal is to isolate China and force it to abandon mercantilist trade practices and theft of U.S. technology, while weakening its capacity for economic coercion against its neighbors, it’ll be hard to achieve without a broad coalition acting in tandem. To an extent, despite their own ongoing trade spats with the White House, allies in Europe and the Western Pacific are still working toward a common goal with the United States. The EU, Japan, Australia, South Korea and Taiwan certainly share the U.S. concern about Chinese moves on the high-end technology front – and are enacting measures such as stricter screening of Chinese FDI as a result.But tightly coordinated action and enforcement is critical. The more cracks China can exploit, by finding alternate export markets and import substitutes, accessing foreign technology in different countries and intimidating countries like Vietnam, the less effective the U.S. offensive will be.The U.S. originally spearheaded the TPP, in large part, to give multinational manufacturers every reason to leave China for countries like Vietnam, while also creating strong incentives for such countries to enforce a common set of rules governing the modern, globalized economy – ones that the U.S. would have the dominant hand in writing. The stalled Transatlantic Trade and Investment Partnership likewise would have helped the EU and the U.S. form a united front in this regard. Strengthening the World Trade Organization, rather than weakening it as the U.S. has done by vetoing all appointments of new appellate judges and threatening to undercut it altogether by simply ignoring its rulings, would too. Over the long term, a U.S.-led rules-based trade regime in the Pacific would boost U.S. leverage over Beijing on a range of issues, help regional states like Vietnam better resist Chinese assertiveness on their own and allow the U.S. to better manage a balance of power in the region from afar.Of course, free trade has had social consequences in the U.S. and Europe that can’t be dismissed as irrelevant to geopolitical considerations, and multilateral trade pacts are imperfect tools. But the lack of a coherent and consistent strategy with which to manage the global effects of a trade war may actually create more problems than Washington had to begin with. It may even lead strategically important countries like Vietnam to scramble for shelter in places the U.S. would rather they not.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.